Will lawmakers fix ‘unconstitutional’ skim off rail tax?

**UPDATE: Late Friday, state House and Senate negotiators agreed to extend the rail tax surcharge for another five years. One thing that wasn’t in the bill that passed, a change to the state’s share of the rail tax. View the full story here.**

Every time you shell out rail tax on all your Oahu purchases, not all of that money goes to the transit project.

The state skims a fee off the top, and that has amounted to more than $163 million already. Where does it all go?

Though it’s called an administrative fee, you may be surprised what it’s spent on and how little is known about where it goes.

With the rail project in the red, some are asking, could all that cash be put to a different use?

A dime here, a dime there, and pretty soon you’ve got $163 million. That’s at least what the state’s administrative fee has tallied up to so far when they take 10 percent of whatever rail tax comes in each month.

By the tax’s sunset in 2022, it could top $373 million and more if lawmakers extend that sunset as the city has asked.

“Originally the thought was the 10 percent being collected from the half-percent that goes to the state would go to pay for the expense of the Department of Taxation to collect and distribute the money back to the city,” said Sen. Donovan Dela Cruz, D-Wahiawa. “The amount we collect from that far exceeds the operational budget of the tax department.”

So all those millions left over go to the state’s general piggy bank to spend at will, becoming more of a general fund as opposed to strictly an administrative fee.

“The administrative fee was never earmarked for the Department of Taxation and all the additional work that we took on,” said Mallory Fujitani, the department’s spokeswoman. “It is and always has been deposited into the state’s general fund. The general fund pays for all of the state services.”

After that, the accounting becomes impossible to track which specific rail dollar ended up paying for what unrelated purpose.

Meanwhile the Honolulu Authority for Rapid Transportation’s shortage is approaching $1 billion and that’s just to build it. Operating it is another question mark.

Always Investigating asked lawmakers, why not just give all of the rail tax money collected to HART to have that much less to extend in terms of years on the sunset?

“Even giving them those additional amounts really would not have helped them to overcome the significant amount of debt they were looking at,” said Sen. Jill Tokuda, D-chair of the Senate Ways and Means committee.

The city and HART have had lots of questions over the years, on everything from getting the county’s share on time to whether the state really needs that 10-percent handling charge.

Honolulu Mayor Kirk Caldwell told us a couple years ago that the city wanted an audit and a greater share of the total tax.

Fast-forward to today when HART says it needs a rail tax extension and it’s poised for passage as we speak. The mayor’s spokesman says Caldwell “did not submit testimony regarding the GET surcharge collection fee this session. Our focus is on extending the GET surcharge.”

As for the rail authority, “Our HART board of directors has taken a position that to the maximum degree possible, those half a percent GET revenues would come to the project to build the rail system,” said HART CEO Dan Grabauskas.

Always Investigating asked, is there any influence or request that the HART board can make at these critical times right when the new legislation for an extension is before them?

“It’s certainly a question that has been raised,” Grabauskas said. “I know there were bills before them in the state legislature to change the 10 percent.”

But those versions went in the discard pile. And as the last day for a conference committee to hammer out details approaches on Friday, May 1, there’s not a peep about it in the most recent version of House Bill 134.

“Typically when you go into conference, you don’t bring up new subject matter that hasn’t really gone through the hearing process where it hasn’t been discussed, so it would be a matter of taking a look at all the life cycles of this particular measure,” Tokuda said. “If at any point in time the administrative fee has been part of the discussion, then theoretically then it is something that could come up.”

The state’s share was discussed in testimony and lawmakers themselves wrote in an earlier draft that the state’s percent be left changeable, and that the state should give the county back anything left over after the true costs of tax taking, counting and splitting.

“It’s there, they should deal with it,” said Tom Yamachika of the Tax Foundation of Hawaii. “They’ve added (making the counties take back) roads in limbo, they’ve added (giving the state rights to) air space above the rail line. I don’t think any of those things were in any of the previous bills, nor was it talked about in any testimony. Fixing the state’s 10 percent was.”

But there may be a more serious matter at hand, one that could jeopardize the rail tax structure as a whole.

“We’ve told them that the 10 percent off the top is unconstitutional,” Yamachika said, “and if they don’t want to do anything about it there may be consequences.”

Yamachika said it’s unconstitutional because governments don’t tax each other. If they did, it would violate a constitutional principle known as “intergovernmental tax immunity.”

Even though the state calls its 10 percent of the rail tax a “fee,” it then diverts so much more than it really needs for collection expenses. That overcharging, plus spending along with all its general fund tax money, makes the “fee” look, walk and talk like a tax, and one that’s leveraged inequitably too.

“The state ends up taking more in general excise tax from the people in Honolulu than they are from any other taxpayer in any other neighbor island,” Yamachika said. “Isn’t there something wrong with this?”